Neoliberalism and rent control

Earlier I posted about neoliberalism, and offered a full-throated defense of it, so consider this post as a critique meant to nibble around the edges of implementation, not an attack on the core concept. My opinion of the core concept still starts and ends with the roughly 1 billion east asian people lifted out of extreme poverty within my lifetime.

Rent control poses a particularly tricky problem for the neoliberal agenda. On its face, rent control blocks a transaction between willing parties. The property owner and the would-be renter would like to exchange a large sum of money for the right to live there, yet the law says that the person who lived there most recently gets to block that transaction, and instead live there for a much smaller sum of money. One might think that the clear neoliberal choice is to end rent control, as Massachusetts did in 1995.

One would be wrong. To oppose rent control on neoliberal grounds is to misunderstand the property rights around real estate. Real estate is owned in a way entirely different from how anything else is owned, because you cannot create or destroy it, nor move it to a new place. Nobody owns a plot of land the way they own a teapot, instead they own a set of rights and obligations. In some cities, those rights include the right to raise the rent on a tenant arbitrarily, and in other cities they don’t. So long as the property owner is allowed to pay a tenant to leave so that they can rent at market rates, then the property rights are still clearly defined, people are free to right contracts as they like, and the neoliberals should be happy.

Except. Except two things:

rent control leads property owners to under-invest in property, and the end of rent control makes rents go up even in the market rate properties near rent-controlled housing. Autor et al. come up with “estimates [that] imply that more than half (55 percent) of the…cost of rent control was borne by owners of never-controlled properties.” That is to say, a huge part of the way that rent control keeps rents down is just by keeping the neighborhood from being as nice, and keeping the property from being as desirable. For better or worse, rent control keeps gentrification at bay.

property owners, a politically powerful group, would love for rent control to end, since it depresses the rents they can get, both by directly preventing them from raising rent, and also by keeping gentrification at bay.

So, where does that leave a good neoliberal on the topic of rent control? Deeply unclear. My gut says that if rent control currently exists, we should err on the side of not ending it, since that is a sudden and large transfer of wealth from the poorer tenants to the richer property owners. When there is rent control, a tenant signs a lease and gets two things–a stream of housing, and also a contract for access to future rent at a similar price.

This implicit contract is just as much theirs as if they had bought a wall street security, and suddenly nullifying this contract should be offensive on two levels:

On purely neoliberal grounds, contracts don’t mean as much if they might be nullified by the state for no good reason, so this undermines faith in the ability to trust a contract. That is a major problem.

For people living in rent controlled apartments, the steady stream of housing services at a price they can afford is presumably a huge part of their net worth. We should be concerned by a sudden large transfer of wealth from poorer to richer people. A lot of people were made worse off by the end of rent control.

My final argument about rent control is that there are better market improvements to be made. Reasonable economists can disagree about whether or not we should end rent control, but there’s basically no case at all against building more urban housing. When we put on our economist hats and make arguments about urban housing policy, we can quibble amongst ourselves about rent control, or we can argue for a relaxation of zoning laws so that property owners can build more housing on the same land, because that is a policy that produces almost exclusively winners!